In a recent
article, I described a reliable and easy-to-use calculator
that could improve the ability of seniors to determine
whether or not their lives would be benefited by a HECM
reverse mortgage. However, having a tool is one thing,
knowing how to use it effectively is another.
illustrates how the HECM calculator can be used to determine
whether or not a reverse mortgage would work for each of
three seniors who have very different types of needs. Senior
Long anticipates possible needs well into the future, senior
Short has pressing needs right now, and senior Medium, who
is more typical, has both present and future needs.
three ways to draw funds on a HECM: as upfront cash, as a
monthly payment, and as an unused credit line. Through a
process of trial and error with the HECM calculator, the
senior finds the option or combination of options that best
meets her needs. She then compares the funds she can draw
with the total settlement costs and decides whether the
benefits are worth the cost. Lurking in the background is
loss of equity in the home, which may or may not be relevant
to any senior.
Senior Long is
79, has a house worth $400,000 with no mortgage balance, and
has no immediate need for additional funds. But Long is
concerned that the nest egg from which she draws her living
expenses will become depleted while she is still alive - -
she will outlive her money. She wants protection against
calculator indicates that on February 20, 2014, Long could
obtain a credit line of $233,000 on an adjustable rate HECM.
If left untouched, the line will grow every year at a rate
equal to the current interest rate plus the mortgage
insurance premium. If her nest egg becomes fully depleted
while she is still alive, she can begin drawing on her
unused line. As an illustration, if the interest rates on
February 20 continue unchanged, the unused line will be
$848,000 when she hits 95. If rates increase in the future,
the available line will be larger.
The ratio of
available funds to financed settlement costs of
$8200 exceeds 28 to 1. I view this as an easy
decision, because even if Long wants to leave as large an
estate as possible, the HECM will absorb very little of the
equity in her house unless she outlives her assets.
is 65, his house is worth $200,000 with a $98,000 mortgage
balance, and because his income has declined, he is having
difficulty making the mortgage payments. The HECM calculator
shows that a fixed-rate HECM will allow him to pay off his
existing mortgage, eliminating the payment burden, but with
nothing left for future draws -- Short will max out at age
65. Further, the ratio of available funds to upfront
settlement charges is only about 10, which makes it a costly
This is a much
tougher call. My advice to Short would be to explore whether
or not there was a way he could continue making payments on
his existing mortgage for 5 more years. The HECM available
to him at that point, in addition to paying off his
remaining mortgage balance, could put money in his pocket or
his future, which a HECM today will not do. But if no such
option exists, taking the HECM now is arguably better than
eating dog food or losing the house to foreclosure.
is 75 with a house worth $400,000 and an existing mortgage
balance of $80,000. The HECM calculator indicates that on
February 17, 2014 she could have paid off the $80,000
balance and had a credit line of $153, 380 on an adjustable
rate HECM. Middle would like to reserve only about $40,000
for future use but wants $10,000 in cash now to pay off some
other debts, and would like as large a monthly payment as
possible for as long as she is in the house.
enters $1,000 as a desired monthly payment, the calculator
indicates that her maximum is $898, and this would leave
nothing in her credit line. So she tries $600, which works
because it leaves a credit line of $46,000.
line for Middle is that she can draw $10,000 in cash, $600 a
month for as long as she lives in the house, and have a
$46,000 credit line in reserve that will grow every month
that it is not used. The present value of the funds she can
draw is 27 times larger than the settlement costs of $8200.
This is an easy decision if Middle has no interest in the size of her estate. Since the transaction depletes much and possibly all of the equity in her house, however, the decision becomes more difficult if she has such a concern. Middle, and the many other seniors in a similar situation, must answer this question for themselves. The best the calculator can do is tell them what the question is.